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>> I have a friend who wants to know what is the best, lowest cost
>>ways to invest-trade the stock market. This would NOT be any
>>daytrading, really not much trading at all, but he will keep an eye
>>on things and may want to move in and out at times in the future,
>>but deffinately not a lot of trading.
>I personally think selling naked puts every month is a nice easy
>way to do things. If the put is exercised on you, then you own the
>stock, and you start selling covered calls on it, using a strike
>at or above your cost basis, until the stock is called away. This
>works pretty well in QQQ, where strike increments are $1 apart.
>-Alex
I agree with Alex here. Typically, you only deal with naked puts on the
third week of every month. I have quite a bit of UPS stock and have been
using that as margin leverage to do naked puts for the past year and a half.
It's actually enough for me to live on, but I did have one bad month. Naked
puts work in a bull or sideways market, but not so much in a bear market.
This is where you use covered calls on the stock that was put to you, so
that you can reduce your losses.
Typically, the margin requirement for naked puts is about 25% of the strike
price value (ie: 1 contract of a 30 strike requires $750) plus the ammount
the put is in the money. For the ammount of money risked, there is usually
a 10-15% return per month. Where I pick my options is from ivolatility.com,
which lists the options with the highest implied volatility, and therefore
the most premium. But you also must check fundamentals and chart patterns
before jumping in. For example, RMBS has a lot of premium but can move 5
points in 30 minutes at the drop of a hat.
The problem with naked puts is that most brokers don't let you do them
because theoretically they have limited reward and risk is virtually
unlimited. I think Interactive Brokers might allow you to do naked puts,
but I don't know what their requirements are.
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